Market Applauds AIG's Second Attempt to Sell ILFC

NEW YORK (TheStreet) -- Investors were thrilled with the announcement by American International Group (AIG) on Monday of a $5.4 billion deal to sell International Lease FinanceCorp to AerCap Holdings (AER).

Shares of AIG were up 2% in the first minutes of trading to $50.70, while AerCap's stock shot up 35% to $33.71.

AIG agreed to sell 100% of its aircraft leasing subsidiary -- which the company describes as a "non-core asset" to AerCap for $3 billion in cash, plus "97,560,976 newly issued AerCap common shares," bringing the deal's value to $5.4 billion, based on AerCap's closing price of $$24.93 on Friday.

The deal is expected to be completed during the second quarter of 2014, and will leave AIG holding 46% of AerCap's common shares.

The agreement is subject regulatory approvals and to a vote by AerCap's shareholders, however AIG said "Waha Capital, AerCap's largest shareholder with a current stake of 26%, has agreed to vote in favor of the transaction."

AIG's net cash benefit from the transaction is expected to be $2.4 billion, "after the settlement of intercompany loans."

This is AIG's second effort to sell ILFC, following an agreement in December 2012 to sell an 80.1% stakte in in the unit for $4.2 billion in cash to an investor group led by Weng Xianding, the chairman of New China Trust Co. Ltd. The investor group had an option to purchase up to 90% of ILFC. Despite an extension to the "walk away" date, the investor group never followed through to complete the deal.

"ILFC is a valuable business, and AIG has always taken great pride in ILFC's reputation for innovation, its pioneering role in aircraft leasing, its industry-leading team of employees, and its consistent and successful market leadership. The combination of AerCap's young fleet of in-demand aircraft and proven portfolio management capabilities with ILFC's attractive order book and broad marketing reach will continue to lead the industry," said AIG CEO Robert Benmosche said in a press release. "However, as we have said all along, the aircraft leasing business is not core to our insurance operations. Upon completion, the transaction will have a positive impact on AIG's liquidity and credit profile and will enable us to continue to focus on our core insurance businesses," he added.

AerCap CEO Aengus Kelly said in the same press release that his firm's "acquisition of ILFC will create the leading global franchise in the aircraft leasing industry." He also said the deal would leave AerCap with "the most attractive order book in the industry."

Sterne Agee analyst John Nadel in a note to clients Monday morning called AIG's deal with AerCap "a solid outcome for buyer and seller."

The big pop in AerCap's shares also bodes well for AIG, but the insurer will have to wait to sell its AerCap shares. Based on his research team's review of the agreement documents, "it appears AIG will be subject to staged lock-up whereby it can sell roughly one-third of its stake in AER after 9, 12 and 15 months post closing," according to Nadel.

American International Group's stock closed at $49.73 Friday. The shares trade for 0.8 times their reported Sept. 30 tangible book value (excluding excluding accumulated other comprehensive income) of $62.88 and for 11.6 times the consensus 2014 earnings estimate of $4.29, among analysts polled by Thomson Reuters. The shares trade for 10.0 times the consensus 2015 EPS estimate of $4.97.

The following chart shows the year-to-date performance of American International Group's shares against the S&P 500:

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.